Berlusconi faces crushing defeat in key Milan election

Rome: Italian Prime Minister Silvio Berlusconi faced a stinging defeat in his northern stronghold of Milan after local elections Monday that threatened to unbalance his fractious center-right coalition government.

Already enmeshed in three corruption trials and a scandal over underage prostitution, the 74 year-old premier was set to lose control of Italy`s financial capital, the base of his vast business and media empire.

With most votes already counted, leftist Giuliano Pisapia was set to capture Milan city hall with some 55 percent of the vote against around 46 percent for outgoing center-right mayor Letizia Moratti.

The center-left easily held on to power in Turin and Bologna in the first round of voting and the latest blow unleashed divisions in the ruling alliance, with Berlusconi`s allies in the hard right Northern League alarmed at the prospect of losing Milan.

"This is a very heavy defeat and the big loser is the premier," said Leonardo Boriani, editor of the Northern League party newspaper La Padania, which has sniped repeatedly at Berlusconi`s PDL party in recent weeks.

The local elections were seen as a referendum on the billionaire prime minister. With the southern port of Naples also set to fall to the opposition Italy of Values party, the result raised the prospect of national elections before the scheduled date of 2013.

"This is the first defeat for Berlusconi`s center-right coalition since they came back to power, and it sends a clear signal of voters` disillusionment," said Maurizio Pessato of pollsters SWG.

"These results make early elections more likely, possibly next year, and I don`t see any chance of meaningful economic reforms being implemented by a lame duck government."

SLUGGISH ECONOMY

With the government preparing to bring forward plans to slash the budget deficit by 40 billion euros ($57 billion) after ratings agency Standard and Poor`s cut its outlook for Italy`s A+ rating to "negative" from "stable," the stakes are high.

Italy has one of the most sluggish economies in Europe, more than a quarter of its young people are unemployed and government policy is constrained by the need to contain a debt mountain equivalent to some 120 percent of gross domestic product.

In a move seen widely as a signal that he believed defeat in Milan was likely, Berlusconi chose to travel to Romania on Monday but senior ministers have ruled out any change of course before national elections due in 2013.

After a bitter campaign marked by accusations of smear tactics and dirty tricks, economic stagnation trumped other issues and voters punished the ruling party as they had in other countries including Germany and Spain.

Italy is the only euro zone economy in which, taking account of inflation, citizens are poorer on average than they were 10 years ago.

Berlusconi`s government last month cut its growth forecast for this year to 1.1 percent from 1.3 percent and cut next year`s outlook to 1.3 percent from 2.0 percent.

S&P`s lowered its credit outlook on Italy this month due to its weak growth and failure to adopt reforms, although worries of an immediate impact on the markets eased after the Treasury sold long-term bonds near the top of its target range Monday.

After being punished for initially calling the vote a referendum on his popularity and policies, Berlusconi blanketed the airwaves with trademark tirades against his longtime enemies: the left and "communist" magistrates.

His last minute television blitz, to which opposition parties were not given the chance to reply, prompted complaints that he was abusing his domination of the media, and magistrates in Rome opened a formal investigation.

Economy Undersecretary Daniela Melchiorre, a former judge, resigned in protest after Berlusconi delivered a rant against Italian magistrates to a surprised U.S. President Barack Obama at the Group of Eight summit in Deauville, France, last week.